High Gas Prices are here to stay - U.S. Motorists should brace for over $4 Gallon Gas this summer and near $7 by 2012: CIBC World Markets

Tightening global supply will drive oil prices past US$200 a barrel in next

four years

Apr 24, 2008, 01:00 ET from CIBC World Markets

    NEW YORK, April 24 /PRNewswire-FirstCall/ - CIBC (CM: TSX; NYSE) -
 Increasingly tight oil supplies will continue to push the price of oil
 higher with the cost of crude hitting US$150 a barrel by 2010 and soaring
 to US$225 a barrel by 2012, forecasts a new energy report from CIBC World
     This will result in skyrocketing consumer gas prices in the U.S. with
 the national average price easily topping $4.00 this summer, reaching $5.50
 in the summer of 2010 and hitting close to $7.00 by 2012.
     The report finds that current oil production estimates produced by the
 International Energy Agency (IEA) overstate supply by about nine per cent
 since it counts natural gas liquids in its numbers. The report notes that
 natural gas liquids, while valuable hydrocarbons, are not a viable
 substitute for oil and cannot be economically used as a feedstock for
 gasoline, diesel or jet fuel.
     "While natural gas liquids only account for 10 per cent of total
 supply, they account for virtually all of the increase in petroleum liquids
 production since 2005," says Jeff Rubin, Chief Strategist and Chief
 Economist at CIBC World Markets. "Stripping out natural gas liquids, oil
 production has not grown for over two years, which certainly goes a long
 way to explaining why oil prices have doubled over that period.
     "In light of these developments we have re-examined our projected
 supply increases. The distinction turns out to be critical. Roughly 50 per
 cent of the increase in expected production is likely to come from natural
 gas liquids, leaving only small marginal gains in petroleum supply over the
 next two years."
     The ratio of natural gas liquids to total "oil" production has been
 rising steadily in recent years and is likely to continue to rise for the
 foreseeable future. Whereas these hydrocarbons represented only about four
 per cent of total oil production back in the 1970s, CIBC World Markets
 expects them to account for over 10 per cent of total production by 2012.
     This increasing ratio is coincident with accelerating depletion rates
 in many of the world's largest and most mature oil fields. While natural
 gas can occur on its own, much of it is "associated" gas-found together
 with oil. As an oil field matures, the resulting loss of reservoir pressure
 releases dissolved natural gas. The released gas forms an expanding cap
 over many mature oil fields, resulting in a rising ratio of natural gas to
 oil and hence a rising ratio of natural gas liquids to oil production.
     Given this trend, Mr. Rubin finds that the global oil market is much
 tighter than the IEA forecasts. He believes oil production will hardly grow
 at all with average daily production between now and 2012 rising by barely
 a million barrels per day.
     "Whether we have already seen the peak in world oil production remains
 to be seen, but it is increasingly clear that the outlook for oil supply
 signals a period of unprecedented scarcity," adds Mr. Rubin. "Despite the
 recent record jump in oil prices, oil prices will continue to rise steadily
 over the next five years, almost doubling from current levels."
     The report also notes that while production increases are at a virtual
 standstill, global demand continues to grow. While higher prices and a weak
 economy have seen demand drop in the U.S. - as it has in other OECD nations
 - this has been more than offset by demand growth outside the OECD.
     "Car purchases in Russia, for example, are exploding as U.S. sales
 stagnate," says Mr. Rubin. "While in India the advent of the TATA, a car
 that will sell for as little as US$2,500, will allow millions of households
 in the developing world to own automobiles when they otherwise could not.
 Millions of new households will suddenly have straws to start sucking at
 the world's rapidly shrinking oil reserves."
     Car sales in Russia grew by nearly 60 per cent in 2007, 30 per cent in
 Brazil and 20 per cent in China. During the same period, car sales declined
 in the U.S. and were flat in Europe. Transport fuels now account for half
 of the world's oil usage, and have driven over 90 per cent of demand growth
 in recent years.
     Mr. Rubin adds that this new and growing market for oil will see world
 crude prices continue to rise and kill demand in the more price-sensitive
 OECD markets. This has been the case since 2005 where a virtual doubling in
 price has led to declining consumption, a phenomenon not seen since the
 early 1980s. He predicts that by 2012, consumption in the rest of the world
 will exceed OECD consumption, a virtually unthinkable prospect little over
 a decade ago, when consumption outside of the OECD measured little more
 than half of the OECD's annual oil intake.
     "In order to accommodate more drivers on the road in Russia, China and
 India, there must be fewer drivers in the U.S. and the rest of the OECD.
 And so there will be. U.S. oil consumption is likely to fall by over two
 million barrels a day over the next five years as retail gasoline prices
 rise from their current US$3.60 a gallon mark to almost US$7 a gallon.
     The complete CIBC World Markets report is available at:
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SOURCE CIBC World Markets